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BPL: Survival game

Jul 3, 2002

BPL Limited, the diversified consumer durable major, is in serious trouble. The market leader in the Indian CTV segment has posted a 53% drop in net profits for the full year ended March 2002. The fall in both revenues and profitability has surpassed our estimates. Continuous diversification from its core business of manufacturing CTVs is one of the key cause of concern.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net sales 4,183 2,657 -36.5% 17,018 11,944 -29.8%
Other Income 31 6 -81.7% 30 6 -79.9%
Expenditure 3,681 2,225 -39.6% 15,309 10,306 -32.7%
Operating Profit (EBDIT) 502 432 -13.9% 1,709 1,638 -4.2%
Operating Profit Margin (%) 12.0% 16.3%   10.0% 13.7%  
Interest 206 213 3.4% 519 821 58.3%
Depreciation 97 153 58.9% 319 401 25.7%
Profit before Tax 230 71 -68.9% 902 422 -53.2%
Tax 35 13 -62.9% 90 43 -52.2%
Profit after Tax/(Loss) 195 58 -70.0% 812 379 -53.3%
Net profit margin (%) 4.7% 2.2%   4.8% 3.2%  
No. of Shares (m) 27.7 27.7   27.7 27.7  
Diluted Earnings per share (Rs)       29.3 13.7  
P/E Ratio (x)         5.2  

The fall in revenues could be attributed to subdued demand for CTVs for the major part of the year. Though CTV sales gained momentum in the last quarter, the year-on-year volumes are estimated to be on the lower side (-5%). Given the intense competitive environment in the durable sector, there was severe undercutting of prices leading to lower price realisations. Average prices of 21' inch CTV models have reportedly fallen by more than 5%. Since BPL derives 58% of revenues from this segment, the fall in revenues has not come as a surprise. We had estimated a 5% fall in CTV sales for BPL in FY02.

Apart from CTVs, the company also has presence in segments including refrigerators, home appliances and audio systems where its market share has been on the decline. The other major diversification was venturing into manufacture of soft energy batteries. Though this division has been growing at a faster rate, there is competition from the black market. Just to put things in perspective, Gillette (India) was forced to exit its soft energy manufacturing plant last year due to its unviability.

Not only is its venture eroding its profitability, the company has other group companies like BPL Refrigeration, BPL Sanyo, BPL Sanyo Tech and BPL Engineering, which are in competition with the promoter company. So, to that extent, there is a conflict of interest. Though BPL has made marked progress on the exports front over the years (7% of revenues in FY01), the contribution to profitability is still negligible.

Apart from growth in revenues, the other key cause of concern is ever-rising debt. BPL's total debt outstanding in FY01 was Rs 7.5 bn, which is 48% of total assets (118% of net worth). Crisil, the country's apex credit rating agency, continously downgraded the company's ratings by more than three times during FY02. Interest costs have risen by a shocking 58% to Rs 821 m in FY02. Interest coverage ratio has come down from 2.7 times in FY01 to 1.5 times in FY02. An astounding 50% of operating profits goes towards servicing debt obligations of the company.

The stock has risen by more than 100% from its 52-week low levels and is currently trading at Rs 71 implying a P/E multiple of 5.2x FY02 earnings. BPL Limited has stake in BPL Cellular, which has been in talks with IDEA Cellular (formerly BATATA) for merging its operations. If it goes through, BPL might benefit and the proceeds could be used to retire debts. But since the core business of the company is under significant pressure, one has to exercise caution before taking investment decisions.

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